For service facing and aftermarket automotive related supply chains, news developments this week have undoubtedly bordered on the surreal or even bizarre.
The ongoing product recall crisis involving airbag inflators’ producer by Takata took on even broader dimensions. The National Highway Traffic Safety Administration (NHTSA) indicated this week that as many as 85 million potentially defective airbag inflators are still inside cars and trucks now being driven across the United States. That number is supposedly in addition to the nearly 29 million inflators that have already been designated for replacement in the ongoing massive product recall campaign. Reports indicate that thus far, at least 11 people have died and over 400 have been injured by defective airbag inflators.
There are many facets compounding this overall logistical challenge. NHTSA itself indicates that because of inadequate reporting information from automotive producers, the agency does not exactly know how many vehicles are exposed to potentially defective airbag inflators that were produced by Takata. There are also multiple inflators installed in every vehicle. Add to this, that previous replaced inflators were not properly designed, causing a second recall.
As Supply Chain Matters has noted in our previous commentaries regarding this industry recall challenge, the problem of premature explosion of the inflators has been linked to long-term exposure to high humidity. Thus the failure profile can be linked to specific U.S. states whose climate matches such humidity, such as Florida and the U.S. Gulf Coast states. One potential fix to the problem has been the addition of dessicant drying agent material to the inflator to lessen the moisture caused by high humidity. That obviously implies a separate part identity.
The far broader problem is the sheer scope of the potential campaign. The government is not even sure it has the authority to mandate a recall of such volume and with such monetary implications. With a potential of over 100 million inflators having to be eventually replaced, the recall campaign would obviously exceed current capacity for producing replacement parts, implying multiple years of effort. The sheer volume is of the magnitude of supporting the redesign of multiple new models of automobiles and trucks and would have to involve many more airbag inflator suppliers. As Supply Chain Matters noted earlier week, suppliers such as Autoliv have already benefited from the crisis, and with such massive numbers, other suppliers will benefit as well. And then there is the biggest question of all, who will pay for all of the replacement parts and installation costs.
The Donald Trump analogy of: “This is a HUGE problem” is an appropriate descriptor.
This saga and its implications will obviously test the limits of automotive service supply chains and dealers for many months to come.
Then the industry has the diesel engine emissions crisis involving certain Volkswagen produced models. Since our prior commentaries in late 2015, we have refrained from other updates because of the sheer kaleidoscope of bizarre actions by Volkswagen. First there was the sacking of senior corporate product design and quality executives. Then came the sacking of the top U.S. executive Michael Horn, who was revered by U.S. dealers, after Horn supposedly proposed monetary gestures to affected vehicle owners.
While the global auto maker has initiated a product recall plan for affected vehicles in Europe, the deadline for a plan to address polluting vehicles in the U.S. has come and gone and remains somewhat a work-in-progress. According to industry reports, VW continues to face upwards of $20 billion in potential fines as well as class-action lawsuits, not to mention a rather tense ongoing relationships with U.S. regulators and legislative bodies as well as its U.S. dealers.
Meanwhile VW senior executives had the shear nerve to position themselves for management bonuses. That had drawn the ire of executives of the IG Metall trade union who are influential members of the company’s Supervisory Board. The news this week is that executive bonuses have now been squashed by that board. Details related to future actions that VW will take related to a recall plan for the U.S. are not expected until VW’s board of directors meets later this month to review various investigative reports related to the U.S. emissions scandal.
The VW service management supply chain remains with lots of pending challenges and unknowns. Thousands of in-service diesel-powered vehicles may be subject to costly vehicle hardware and software fixes that potentially will involve significant labor hours per vehicle. Unsold diesel-powered vehicles remain in dealer lots awaiting a disposition as well. If a vehicle recall is initiated, individual owners are likely to very intolerant to repair times that extend over many, many months. Then again, what-if VW elects to buy-back certain models? That’s a reverse supply chain challenge in the making.
Overall, automotive service management supply chains remain stressed and face unprecedented process and execution challenges in the coming months and years. There is obvious learning that will come from this ongoing multi-brand crisis, involving product-design, supplier quality and supplier management dimensions. Many consumers will be impacted and will get first-hand knowledge of the effects.
This Editor was recently alerted to a blog posting penned by Anders Remneback appearing on The Innovators Solution blog hosted by supply chain planning software provider ToolsGroup. We are bringing this to the attention of our Supply Chain Matters readers because of its timeliness to the increasing complexity involved in planning an Omni-channel focused supply chain.
This posting, What’s wrong with ABC inventory classification?, explains why traditional ABC inventory planning process methodology, which is anchored in an operational or logistics planning perspective lacks a connection to customer fulfillment or sales and marketing needs. In this context, the author helps the reader to differentiate what is often termed to be “inventory management” vs. “inventory optimization.”
Inventory optimization techniques allow the flexibility in the use of what is termed “service classes” which in essence are customer fulfillment service needs. Inventory optimization techniques in essence, calculate “stock-to- service” curves, optimizing individual service and safety stock levels to an SKU location. As noted by the author:
“The inventory optimization software automatically calculates a service level for every SKU-Location that aggregates to the total service level target for the overall service class, achieving “service level optimization“.”
This argument is especially pertinent to producers of consumer focused goods which are increasingly being planned for Omni-channel fulfillment. As we have pointed out to readers, online Omni-channel needs are driving a new wave of SKU (item level) proliferation explosion because of the needs of various fulfillment channels. Trying to plan such landscapes with traditional ABC inventory management techniques is sub-optimal and inefficient in terms of overall inventory management. This is especially pertinent for retailers attempting to fulfill customer needs from a centralized inventory management approach, one that balances inventory needs for both traditional brick-and-mortar retail as well as online channel needs.
Once more, with today’s increasing advancements and cost efficiencies in in-memory and database streaming technologies, multi-echelon inventory optimization technology can be far more affordable from certain software vendors and is increasingly being integrated into supply chain planning application suites.
A final observation to share is the following. Many supply chain organizations that adopted supply chain planning software in the past opted to deploy heuristics vs. full optimization techniques. At the time, the reasons were perhaps justified in terms of supply chain profile, overall size of planning data to be managed along with technology skills adaptability at the time. Many organizations felt that heuristics based planning techniques would be more supportive of more response based planning processes, those which adopt a continuous net-change planning approach.
This author is of the view that such practices should be re-examined, especially in the light of multi-echelon inventory optimization vs. generalized inventory management and replenishment. The new world of Omni-channel fulfillment brings its own set of customer fulfillment service goal attainment, overall inventory investment and gross margin goals for any line-of-business. Generalized planning without the use of targeted optimization coupled with more predictive analytics simply will not suffice in Omni-channel fulfillment.
Within our 2016 Predictions for Industry and Global Supply Chains, Prediction Five called out specific industry challenges in the New Year, which included automotive supply chains. An unprecedented level of regulative scrutiny has precipitated a large amount of product recalls that are taxing service focused and repair parts supply chains.
On Monday of this week, U.S. auto safety regulators fined luxury automaker BMW $10 million, part of a $40 million civil settlement over the German automaker’s safety lapses. The fine is the second paid by BMW since 2012 and the latest in a series of civil penalties imposed on major automakers by the National Highway Traffic Safety Administration (NHTSA).
Under the settlement, BMW admitted it did not comply with minimum crash protection standards, failed to notify owners of recalls in a timely fashion and failed to provide accurate information about its recalls to NHTSA.
According to a syndicated published report by Reuters, this settlement ends a NHTSA investigation into whether the company failed to issue a recall within five days of learning that it’s 2014 and 2015 Mini Cooper models failed to meet regulatory minimums for side-impact crash protection.
The $40 million settlement includes a $10 million fine, a requirement that the company spend at least $10 million meeting the order’s performance obligations, and $20 million in deferred penalties if the company fails to comply with the order or commits other safety violations.
BMW agreed to hire a government-approved independent safety consultant and disclose updated procedures to NHTSA. The agency has required a number of automakers to agree to independent monitors or retain outside consultants to improve safety procedures as part of settlements.
Of course, the most visible development in this area will be how government regulators ultimately deal with Volkswagen and its admission of circumventing air pollution standards in the U.S. and other countries.
Earlier this month, the agency fined Fiat Chrysler Automobiles $70 million for failing to disclose vehicle crash death and injury reports. That automaker was obligated to pay $70 million in July to resolve allegations it mishandled nearly two dozen recall campaigns covering more than 11 million vehicles. In January, Honda paid $70 million in fines for failing to disclose death and injury reports.
Hundreds of millions of dollars in fines may well be better invested in advanced technology that mines vehicle performance and repair incidents and more proactively alert regulators to issues. Then again, some dis-investment may be required to impress upon senior management that the implications for not conforming to timely regulatory reporting is a reduced performance bonus equivalent to the company’s cost of fines incurred.
Report Card for Supply Chain Matters 2015 Annual Predictions for Industry and Global Supply Chains- Part Five
While industry supply chain teams wrap-up their various 2015 strategic, tactical, and operational line-of-business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs.
In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.
In our Part Three posting, we revisited our supply chain industry-specific predictions.
In Part Four, we revisited our prediction on smarter data and predictive analytics and our prediction of a turbulent year in global transportation.
In this final scorecard commentary, we revisit our final two predictions.
2015 Prediction Eight: Industry Supply Chains Step-up Efforts Towards Supply Chain Vertical Integration and Modular Platform Strategies
Self-Rating: 3.0 (Max Score 4.0)
Our prediction was a belief that industry or company specific vertical integration and modular product platform strategies would accelerate in 2015. Our reasoning was that as manufacturers pursue a need for more agile and flexible global manufacturing sourcing strategies, that modularity in product and supporting process platforms will become more prominent. This strategy further supports needed flexibilities in geographical and individual customer fulfillment for various market channels. Such strategies have been well demonstrated in high-tech, consumer electronics and in automotive environments, and our prediction was that these efforts would expand both in these industries and in others as well.
Our belief was that vertical integration strategy shifts would impact contract manufacturing models in the latter-half of this year, and indeed there are signs of this occurring. In a Supply Chain Matters commentary in late August, we provided evidence of a changing contract manufacturing model within the high-tech industry. CMS firms such as Foxconn and Flex are steadily executing vertical integration and product modularity strategies. Foxconn is believed to be finalizing plans for investing in a massive electronic display manufacturing facility in China that would serve display needs for smartphones, consumer electronics and other industry needs. The leading CMS is also involved in a number of other strategies that integrate the high tech component supply chain. Flex itself is remaking itself to be a leading manufacturer of Internet of Things (IoT) enabled connected products that feature common components. That strategy has provided Flex with entry into other industrial verticals including medical devices and home appliances.
In the automotive sector, Tier One suppliers such as Johnson Controls and others are actively pursuing strategies to be one-stop suppliers for major motor vehicle functionality such as safety systems, on-board electronics, or alternative energy propulsion and regenerative systems.
We believe that these are two meaningful examples of more vertical integration as well as common platform that will evolve across other industries as manufacturers continue to revisit their contracted arrangements with contract manufacturers, suppliers and owned manufacturing. While the timing related to our prediction may arguably be challenged, the evidence of strategy remains.
Self-Rating: 3.8 (Max Score 4.0)
This final prediction was somewhat obvious as-well. The prediction was that because of two primary motivations, multiple equipment manufacturers and services providers will place added emphasis in evaluating their service focused supply chains. That included after-market business process services, parts, service delivery, supply and demand networks.
One motivation was the increasing incidents and broader occurrence of product recalls brought about by tighter global regulation. Manufacturers have no choice but to protect the brand and customer retention. The most obvious example was reflective in the automotive industry where a massive volume of high-visibility product recalls remain even as we pen our scorecard. GM’s faulty ignition switch and other component problems, the multiple ongoing vehicle recalls among multiple global brands involving defective Takata airbag inflators continue to stress service supply chains. Even Tesla is not immune, having just recently recalled its entire on-the-road vehicle fleet to repair faulty seat belt connectors. The unpredicted bombshell in 2015 was Volkswagen’s alleged tampering with emissions from its small and mid-range diesel engines that is currently providing major challenges to its brand. Yet to play out is the timetable for how all of the current effected vehicles on-the-road will be repaired or retro-fitted. In commercial aerospace, a continued aging fleet of aircraft operating around the clock adds more exposure to timely service and parts needs. Where airlines have discovered more cost-effective models for outsourcing service needs, service providers themselves, whether independent or OEM, continue to experience the need for investment in processes and systems.
The other driver we predicted was building interest in IoT and connected networks which present new business models where equipment serves as the demand signal for maintenance, repair or consumable parts. Throughout 2015, there was high interest in this area, and General Electric was again the benchmark for how money can be made with a connected equipment business model. Moving into 2016, we anticipate that interest will turn toward more discernable deployment of integrated product and service platforms.
This concludes our series of looking back on 2015 to assess how our Supply Chain Matters Predictions fared. Once again, we trust our readers were able to gain benefits from following our series. Again, feel free to share your own observations regarding our predictions, along with other important key supply chain, procurement and B2B developments that were meaningful in 2015.
As we move toward the latter stages of December, keep your browser pointed to Supply Chain Matters as we will shift our attention toward unveiling our 2016 annual predictions for industry and global supply chains.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In June, The United States House of Representatives voted to repeal country-of-origin labeling (COOL) for beef, pork, and chicken and social media commentary regarding the move continues to dominate as an ongoing trending topic. The reasons are obvious- consumers demand and expect knowledge as to the specific sourcing origins of food products. Consumers are right to be concerned and watchful, and the impact of these actions continue to impact food, beverage and consumer product goods focused supply chains.
The original COOL legislation had good intent, requiring meat products sold in supermarkets and grocery stores to specifically indicate where the animal was born, raised and slaughtered. Reports indicate that the original law was prompted by the lobbying of U.S. ranchers who compete with the Canadian cattle industry, and later garnered the interest of consumer watchdog interests.
But this current ongoing process now involves the political and economic implications of other supply chains, in addition to food.
The broader issue involves the World Trade Organization (WTO) which after the initial U.S. legislation was passed, ruled that the labels regarding animal origin would have a discriminatory impact against the two U.S. border countries, Canada and Mexico, and thus a barrier to free trade. Both border countries indicate that the law requires that animals be segregated by country of origin, a costly process that has U.S. wholesale buyers avoiding the buying of export origin meat products.
Both countries are seeking permission to impose what is described as billions of dollars in added tariffs on U.S. goods in retaliation. And there lies the supply chain impact which threatens to change the existing economics and stakeholder interests of cross-border trade.
U.S. legislators are thus caught in what is described as a damned if you do, or damned if you do not conundrum regarding the existing COOL repeal legislation which has now moved to the U.S. Senate for consideration.
In order to seek additional insights regarding the implications of COOL, Supply Chain Matters had the opportunity to recently speak with Candace Sider, vice-president of regulatory affairs, Canada, at international trade compliance services provider Livingston International. Ms. Sider has a significant background in understanding Canada’s regulatory processes involving interaction with federal and provincial officials, regulatory agencies and policymakers.
She explained that Canada viewed the original U.S. COOL labeling requirements as having a $3 billion impact on that country’s cattle and hog industry. During the current arbitration period, decisions are expected to be made as to what commodities would remain on the original impacted list. If the surtax were to be implemented, importation from the U.S. of the subject products could ultimately passed on to consumers. The U.S. government has indicated to the WTO that it disputes Canada’s figures. However, Canada is preparing to lift tariffs on U.S. imports that include in excess of 100 different commodities including products such as range and refrigerator parts, wine, and yes, chocolates.
The WTO is not expected to rule on the U.S.’s latest appeal to the threatened tariff increases until early August, or possibly September. Meanwhile, the implication of the ongoing dispute actually impacts more than just meat-focused supply chains.
Livingston is currently advising its clients to prepare for a number of potential scenarios involving the ongoing trade dispute process invoked by COOL.
Where all of this eventually ends-up is subject to many viewpoints. After all, this is very much a process driven by economic, multi-industry and lobbyist forces.
However, one aspect is clear. The complexity of today’s globally based supply chains takes on many different dimensions and implications. While you might have perceived that legislation affecting packaging disclosure of meat products has little to do with service parts, chocolates and wine, it indeed does. The takeaway is to nurture contacts and resources that can alert your team to ever changing developments and multi-industry implications.